Question

During the fiscal year ended December 31, 2017, Swanson Corporation engaged in the following transactions involving notes payable:

Aug. 6             Borrowed $12,000 from Maple Grove Bank, signing a 45-day, 12%

            note payable.

Sept. 16  Purchased office equipment from Seawald Equipment.  The invoice amount was $18,000, and Seawald agreed to accept, as full payment a 10 percent, three-month note for the invoice amount.

Sept. 20  Paid Maple Grove Bank the note plus accrued interest.

Nov. 1  Borrowed $250,000 from Mike Swanson, a major corporate stockholder. The corporation issued Swanson a $250,000, 15 percent, 90-day note payable.  

Dec. 1  Purchased merchandise inventory in the amount of $5,000 from Gathman Corporation.  Gathman accepted a 90-day, 14 percent note as full settlement of the purchase.  Swanson Corporation uses a perpetual inventory system.

Dec. 16  The $18,000 note payable to Seawald Equipment matures today. Swanson paid the accrued interest on this note and issued a new 30-day, 16 percent note payable in the amount of $18,000 to replace the note that matured.  

a. Prepare journal entries to record each of the above transactions.  Use a 360-day year in making the interest calculations.

b. Prepare the adjusting entry needed at December 31 to accrue interest.

c. Provide a possible explanation why the new 30-day note payable to Seawald Equipment pays 16 percent interest instead of the 10 percent rate charged on the September 16 note.

Answer 1

A. Journal Entries